Cambridge International AS and A Level Economics: Oligopoly and game theory (9708) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover part of section 7.6.4 of the Cambridge International AS and A Level Economics 9708 syllabus (for examination in 2026, 2027 and 2028): contestable markets, price and non-price competition, collusion and the Prisoner’s Dilemma, and efficiency in oligopoly. Topics 1 to 6 are AS Level content and topics 7 to 11 are A Level content; this unit is A Level only. All figures are invented. Read the study guide and revision notes first, and see the Cambridge Economics hub and checklist.

Questions

1. State three features of a contestable market. [3]

2. Distinguish between price competition and non-price competition, giving one example of each. [4]

3. Two firms, A and B, each choose to Restrict or Expand output. Pay-offs are annual profit in millions (A, B).

	B: Restrict	B: Expand
A: Restrict	18, 18	8, 24
A: Expand	24, 8	12, 12

(a) Show that Expand is A’s dominant strategy. [2] (b) State the likely outcome and compare joint profit with the cooperative outcome. [2] (c) Explain why the firms do not both Restrict. [2]

4. A firm sells 500 units at 80 with a unit cost of 40. It cuts price by 10% to 72.

(a) Calculate its profit before the cut. [1] (b) If rivals do not respond, sales rise to 680. Calculate the price elasticity of demand and the new profit. [2] (c) If rivals match and the firm’s sales rise only to 530, calculate the profit and comment. [2]

5. A single bus operator faces demand P = 18 − 0.5Q, marginal cost 6 and a recoverable fixed cost of 40 per day. The market is contestable.

(a) Calculate the profit-maximising price and the profit. [3] (b) Calculate the highest price that deters hit-and-run entry. [3]

6. An oligopoly faces market demand P = 90 − Q (Q in thousands) and constant marginal cost 30.

(a) State the output that would be allocatively efficient. [1] (b) Calculate the price and output if the firms act together to maximise joint profit. [2] (c) Calculate the deadweight loss. [2] (d) Calculate the deadweight loss if tacit collusion holds price at 50. [1]

7. Explain why collusion between oligopolists tends to break down. [4]

8. Use the pay-off matrix in question 3. Suppose firm A cheats in year one by choosing Expand while B Restricts, and thereafter both choose Expand in every year. Without discounting:

(a) Compare A’s total profit over two years with the profit from both Restricting. [3] (b) Repeat for three years and state what this suggests about collusion. [2]

9. (a) Define X-inefficiency. [2] (b) Explain why an oligopolist protected by high barriers to entry may be X-inefficient. [4]

10. Discuss whether a market with only two firms must be uncompetitive. [8]

11. Assess whether non-price competition benefits consumers. [8]

Answers

1. Any three of: low or no barriers to entry and exit [1]; no or low sunk costs [1]; entrants can use technology as good as the incumbents’ [1]; good information for entrants; hit-and-run entry possible. [3] Examiner insight: A list of features with no wording about entry or exit tends to earn little; name the feature precisely.

2. Price competition is rivalry through price [1], for example a discount or price war [1]. Non-price competition is rivalry through factors other than price [1], for example advertising or after-sales service [1]. [4] Examiner insight: The distinction needs both definitions; two examples with no contrast do not show the difference.

3. (a) If B Restricts, A earns 18 by Restricting and 24 by Expanding, so Expand is better [1]. If B Expands, A earns 8 or 12, so Expand is better again [1]. [2] (b) Both Expand and earn (12, 12), joint profit 24 [1], against 36 if both Restricted, a loss of 12 [1]. [2] (c) Each firm gains by Expanding whatever the rival does [1], so a promise to Restrict is not credible because each is tempted to cheat [1]. [2] Examiner insight: Checking both of the rival’s options is what makes a strategy dominant; one comparison is not enough.

4. (a) (80 − 40) × 500 = 20,000 [1] [1] (b) Sales rise by 36%, price falls by 10%, so elasticity = 36 ÷ −10 = −3.6 [1]. Profit = (72 − 40) × 680 = 21,760 [1] [2] (c) Profit = 32 × 530 = 16,960 [1], which is 3,040 lower than before. A matched cut lowers profit, so price cuts are risky in oligopoly [1]. [2] Examiner insight: A comment on the calculation tends to gain credit only if it uses the figures, such as the fall of 3,040.

5. (a) MR = 18 − Q = 6, so Q = 12 [1], P = 18 − 6 = 12 [1]. Profit = 12 × 12 − 6 × 12 − 40 = 32 [1] [3] (b) Set P = AC: (18 − 0.5Q)Q = 6Q + 40 [1], so Q² − 24Q + 80 = 0, giving Q = 20 or 4. Take Q = 20 [1]. P = 18 − 10 = 8 [1], and average cost = 6 + 40/20 = 8 [3] Examiner insight: Show why the larger root is used; a bare price with no check that profit is zero is easy to get wrong.

6. (a) P = MC: 90 − Q = 30, so Q = 60 [1] [1] (b) MR = 90 − 2Q = 30, so Q = 30 [1] and P = 60 [1] [2] (c) DWL = ½ × (60 − 30) × (60 − 30) = 450 [1] on the correct triangle [1] [2] (d) At P = 50, Q = 40, DWL = ½ × 20 × 20 = 200 [1] [1] Examiner insight: The triangle is drawn between the actual output and the efficient output, so the base is 60 − 30 and not 60.

7. Each firm earns more by cheating on the agreed price or output [1] while others keep to it [1]. Breakdown is more likely with many firms or differentiated products, which make monitoring hard [1], and with falling demand or new entry [1]. [4] Examiner insight: Linking the incentive to cheat to the conditions that make it worse tends to be stronger than listing conditions.

8. (a) Both Restrict: 18 × 2 = 36 [1]. Cheat: 24 + 12 = 36 [1]. They are equal, so A gains nothing by cheating over two years [1]. [3] (b) Three years: Restrict 54, cheat 24 + 12 + 12 = 48 [1]. Collusion pays when the horizon is long enough that punishment outweighs the one-off gain [1]. [2] Examiner insight: State the assumption of no discounting and permanent punishment; the conclusion depends on it.

9. (a) Costs above the lowest possible level [1] because of weak cost control or lack of pressure to be efficient [1]. [2] (b) High barriers mean little threat of entry [1]. Without pressure on profit, managers may tolerate waste, such as high pay or poor contracts [1]. Supernormal profit can mask higher costs [1], so the firm is above the lowest average cost [1]. [4] Examiner insight: Explain the mechanism that links weak competition to higher costs.

10. Reasons it can be competitive: if the market is contestable, entry threat forces price near average cost [1]; two firms may compete on price [1]; consumers may switch easily [1]. Reasons it may not be: high sunk costs deter entrants [1]; two firms can collude tacitly [1]; products may be differentiated, giving market power [1]. Judgement: it depends on barriers and sunk costs [1], and on whether collusion is stable or checked by competition law [1]. [8] Examiner insight: Strong answers tend to reach a reasoned conclusion with a stated condition, not just two lists.

11. For: better quality and choice [1]; innovation can become dynamic efficiency [1]; avoids damaging price wars [1]. Against: advertising costs raise prices [1]; spending may be matched and wasted, as in the Prisoner’s Dilemma [1]; brand loyalty can act as a barrier to entry [1]. Judgement: consumers gain if the spending creates real value [1], and lose if it only moves market share [1]. [8] Examiner insight: Distinguish informative advertising from persuasive advertising; this tends to give the judgement something to rest on.

Where marks are usually lost

• Naming a feature of a contestable market without linking it to entry or exit.
• Assuming a contestable market must have many firms.
• Checking only one of the rival’s options when finding a dominant strategy.
• Calculating deadweight loss with the wrong base.
• Giving a limit price with no check that profit is zero.
• Treating collusion as stable without the incentive to cheat.
• Listing advantages and disadvantages with no final judgement.
• Failing to use the figures given when asked to comment.

Next steps

• Review the revision notes and study guide.
• Go to the Cambridge Economics hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, section 7.6.4, published by Cambridge University Press & Assessment.